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Why international buyers import US ethane
Over the past decade, rapid unconventional oil and gas development in the US resulted in significantly increased ethane availability. Increased ethane rejection reduced ethane prices to parity with natural gas, incentivizing a wave of investment in both domestic consumption and exports. The US began exporting ethane via pipeline to Nova Chemicals' Sarnia plants in Canada in early 2014. The first waterborne cargo was loaded for Norway in March 2016, and ethane began reaching Reliance Industries' facilities on the west coast of India in late 2016. Other countries currently importing US ethane include UK, Sweden, Mexico, and Brazil.
Some international buyers import US ethane to fill the void left by dwindling domestic ethane supply. Others take advantage of the lower cost of US ethane to diversify, making additional investments to accommodate the more economical feedstock. Figure 1 breaks down the ethane imported by each company in 2018, along with the capital spent on related projects.
INEOS owns two gas crackers at Grangemouth, UK and Rafnes, Norway. Feedstock for these facilities traditionally relied on North Sea production. Declining ethane production in the UK caused INEOS to close the Grangemouth cracker in 2008. Production in Norway has been more stable. To capitalize on its early-mover status in securing US ethane, however, INEOS decided to expand capacity by investing in a new furnace at Rafnes. With eight dragon-class ships, the INEOS fleet acts as a virtual pipeline to bring US ethane to Europe.
Borealis soon followed INEOS into the waterborne ethane trade. Borealis still has an ethane supply contract with Equinor. Yet in 2017 when the company saw an opportunity to secure feedstock long term for its Stenungsund, Sweden cracker, Borealis started importing from the US. In 2018, this flexible gas cracker imported 450,000 tons of ethane, higher than the annual average of 350,000 tons per year used during the prior five years.
In order to enhance its competitiveness, Reliance revamped its existing ethylene crackers at Nagothane, Hazira, and Dahej to increase capacity. It also built a 480-kilometer pipeline connecting the facilities. And Reliance set up an even larger virtual pipeline than INEOS, commissioning the world's first very large ethane carrier (VLEC) fleet to supply US ethane to its crackers. The sourcing of ethane at these facilities plus integration with Reliance's Jamnagar refinery provides the company with feedstock security as well as optionality in feedstock usage.
Similar arrangements were made by several other international chemical firms. Brazilian petrochemical player Braskem signed a 10-year contract with Enterprise Products Partners and started lifting ethane in 2017. Underpinning the plan is a US$105 million upgrade project at its cracker in Camaçari, Bahia to use the ethane. Improvements will also be made to allow the Port of Aratu and the connecting pipeline to receive ethane. In addition, SABIC upgraded its Olefins 6 plant at North Tees and added ethane offloading and storage facilities at the port.
Anticipated interest in importing US ethane
The countries currently importing US ethane are not alone in their interest. In our view, there are three types of players that might consider importing US ethane:
- Those currently cracking domestically produced ethane, thus having potential to diversify supply or crack more ethane
- Non-ethane crackers that could potentially be re-configured to use ethane as a feedstock
- Countries that are short in ethylene and willing to invest in greenfield projects to use ethane as a new feedstock
Looking beyond existing importers, more than a dozen other countries also use ethane as part of their ethylene feedstock. A number of these countries are located in the Middle East and Commonwealth of Independent States regions, where vast local oil and gas resources typically limit the need for US imports.
Some other countries with ethane access could consider US ethane, however - either for supply diversity or to crack more ethane due to favorable economics. For example, declining ethane supply in Europe could eventually lead to expansion of US imports there. Both Borealis in Sweden and TOTAL in Belgium currently have contracts with Equinor to provide ethane feedstock, but US ethane might find its way into Belgium as Norwegian oil and gas production matures. In Asia, Thailand and Malaysia currently use ethane from domestically produced natural gas. However, declining domestic gas production may cause both countries to reconsider their options.
If US ethane remains competitive against naphtha, we could expect additional companies to upgrade to allow ethane cracking. This opportunity is mostly relevant to crackers located in coastal areas, which allow easy access to waterborne ethane. For example, Repsol at Tarragona, Spain has increased its use of lighter feeds (propane and butane so far), but the company could be enticed by plentiful lower-cost ethane. Versalis in Italy might be a candidate for retrofitting its own traditionally naphtha-based coastal crackers. As South Korea actively optimizes its crackers, which are largely based on naphtha feedstock, ethane could become another option.
For greenfield crackers that use US ethane, China has the largest potential. The first of such projects will be SP Chemical's new ethane/propane (E/P) cracker in Taixing, China, which is expected to be in service by Q4 2019.
Building an ethane cracker in China offers many benefits. Based on IHS Markit estimates, a Chinese ethane cracker requires about $1,000 of total fixed investment (TFI) per metric ton of ethylene, which is much lower than coal-to-olefins (CTO) or naphtha- based ethylene plants and propane dehydrogenation (PDH) projects (see Figure 2). Ethane crackers also have the highest ethylene yields. In China, ethylene self-sufficiency is still low, while propylene self-sufficiency is much higher. A higher ethylene self-sufficiency would be economically and operationally beneficial to balance ethylene and propylene market fundamentals and requirements.
However, China is not the only place where greenfield ethane crackers are being considered. INEOS is planning an ethane cracker in Antwerp, Belgium to go with its greenfield PDH plant at the same site. This investment is at least in part underpinned by INEOS' unique position: the ability to access large volumes of US ethane while still being Europe's largest net buyer of ethylene, which helps it feed its polyethylene and other derivatives businesses. Few other European players are likely to be in a position to add greenfield capacity, but there are likely markets in other regions where a new cracker could make sense.
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